Robust Retail Sales Boosted Q4 Activity in US Warehouses

Key Points: 

• The IBI Activity Index has been within a normal expansionary range of 56-60 since May 2023, hitting the high end of the range at 60.3 in January 2024 as robust retail sales and restocking increased activity in U.S. warehouses. 
• Higher completions increased availabilities, particularly for bulk space in a handful of markets.  Because groundbreakings of logistics buildings fell by two-thirds from peak levels, deliveries are poised to contract sharply beginning in H2 2024.
• U.S. rents grew by 6% in 2023, with declines in Southern California countering high single-digit to mid-teens growth in most markets. Rents climbed at the quickest pace in the Sun Belt and Southeast. 

Realized demand increased in Q4. U.S. net absorption increased 31% quarter-over-quarter (q/q) in Q4 to 52 million square feet (MSF), in line with historical expansionary averages. Looking ahead, rising proposal activity and quickening deal gestation times suggest increasing demand for space, and leading indicators align with an annualized demand run rate of about 200 MSF.

The IBI utilization rate increased to 84.3% in January after averaging 83.8% in Q4 2023. Strong retail sales for the holidays depleted inventories, pulling the inventories to sales ratio (I/S ratio) downward through year-end 2023 and emptying warehouse racks. From June to November, the I/S ratio fell by 60 bps, approximately 60% due to strong retail sales and 40% due to reduced inventories. 

Building completions reached a new quarterly high of 141 MSF in Q4. New supply was concentrated in larger spaces in the outlying submarkets of major inland markets, including Dallas, Houston, Atlanta and Phoenix. New supply was the primary driver of increased availabilities, particularly in bulk spaces. Vacancy in spaces over 300,000 square feet rose 100 bps q/q to 7.9% in Q4, and vacancy rose 40 bps q/q to 5% in smaller spaces.

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Project starts continued to fall, confirming a cliff for new deliveries in late 2024. In Q4, starts were more than 25% below pre-COVID levels, falling more than two-thirds from the peak.

Rents continued to increase outside of a few pockets, totaling 6% for 2023. Rents climbed in Q4 throughout the U.S., except for select port-connected markets that saw rents surge in 2021 and 2022. The fastest-growing rents were in the southern part of the U.S., including double-digit annual growth in Phoenix, Las Vegas, Austin, and major Florida and North Carolina markets.

Conclusion

The U.S. market absorbed record new deliveries while demand steadied around pre-pandemic averages. While many customers continued to increase their footprints in 2023, economic uncertainty and a high cost of capital caused others to delay real estate decision-making into 2024. As a result, we expect demand to increase in 2024, colliding with a sharp fall in new supply. 

Therefore, the window for customers to act on increased availabilities in select locations could be brief. Scarcity is likely to return to many locations in the latter part of 2024, applying upward pressure on rents and rewarding those who plan for upcoming requirements.

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